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ORLEN Group Upstream operations

Wiesław Prugar

The 10th anniversary of ORLEN Upstream’s operations was a breakthrough year for the Upstream segment. We successfully finalised new acquisitions of production assets in Poland, the US and Canada. The dynamically changing macroeconomic environment required and still requires us to take optimisation measures. On the one hand, they affect the re-allocation and optimisation of capital expenditure and result in reductions of operating expenses, but, on the other, create growth opportunities, as attested to by the acquisitions we completed in 2015, which significantly boosted our production of hydrocarbons and expanded the reserves held by the ORLEN Group to roughly 100MBOE.

Wiesław Prugar President of the Management Board, ORLEN Upstream

2015
  unit    
Poland
2P oil and gas reserves MBOE 8.2  
Wells2 number 14  
Licences3 number 15  

1) The output from the acquired assets of FX Energy will be recognized as of 2016.
2) Cumulatively.
3) Excluding licences held by PGNiG, in which ORLEN Upstream is a partner.

2015
  unit    
Canada
2P oil and gas reserves MBOE 89  
Production MBOE per annum 2.6  
Average production4 MBOE per day 7.1  
Production structure (liquids/gas) % 44 / 56  
Net wells (drilled in a given year) number 11.6  

4) The average production in the fourth quarter of 2015 was 7.3 MBOE per day.
 

MARKET TRENDS:

When faced with an oversupply of crude oil and decreasing prices, oil producers tend to cut operating expenses and scale back on new investments projects. The base case scenario presented in the World Energy Outlook 2015 (WEO) report of the International Energy Agency assumes that oil production will grow by 8% by 2040 (to 104 Mboe/d), initially, until 2020, chiefly in non-OPEC countries, later on also in OPEC members.

The growth driver for crude oil demand in the short term is low prices. However, this factor will be gradually offset by reduced expectations of economic growth in a number of key economies as well as improved emission efficiency and emission policies. The US, being the largest crude oil consumer in the world, will experience plummeting demand as a result of the introduction of stringent fuel consumption standards in the transport sector. India and China are poised to become the largest consumers of crude oil past 2030.

Currently, gas markets vary significantly between regions, with strong gas demand in the US, the Near East and China, and poor demand in Europe. The base case scenario assumes that the global gas market will show a steady growth of 1.4% annually, reaching 5 160 bcm in 2040, to become the second fuel in terms of share in the global energy mix. The International Energy Agency’s scenario forecasts the largest growth of demand for gas in China and the Near East. Latin American (Brazil, Argentina) and African (Nigeria, Tanzania and others) countries, as well as India will record the highest increase in natural gas consumption, albeit at varying rates. The US remains the largest consumer of natural gas globally, with demand for this resource rising by 15% by 2040.

Additionally, it is expected that by 2020 the supply of gas produced from unconventional deposits in the US will grow to a level giving it an over 50% share in the global gas market.

2015 marked the 10th anniversary of PKN ORLEN Management Board’s decision to approve the strategy providing for the formation of an exploration and production segment.

Currently, ORLEN Upstream operates in eight Polish provinces and is a recognised operator in Canada.

Operations in Poland

2015 brought about major reshuffles on ORLEN Upstream’s asset map. These were related to the acquisition of new licences as well as abandoning less promising ones.

ORLEN Group’s exploration and production assets in Poland

Operations in Poland
Source: In-house analysis.
1) Commercial production from the Płotki project (100% gas).

In 2015, ORLEN Upstream acquired two licences from Deutsche Erdoel AG and negotiated entry into a joint operations agreement with PGNiG S.A. concerning eight licence areas in the Karpaty region (Bieszczady project). In October 2015, following a tender procedure, the company acquired the Siennów-Rokietnica licence (covering an area situated in the Rzeszów province) from the Ministry of the Environment. On December 31st 2015, it also closed a transaction to buy a 100% stake in FX Energy Inc., thus adding an interest in seven producing fields to its portfolio of its Polish assets.

Currently, gas is produced in cooperation with PGNiG S.A. (FX Energy’s share is 49%). As at the end of 2015, the 2P reserves held by the ORLEN Group in Poland amounted to 8.2MMBOE. The potential offered by the newly acquired assets includes, apart from the production, exploration licenses.

ORLEN Upstream is currently conducting operations, independently or with a partner, in 29 license areas situated in 8 provinces. The company has 100% interests in 14 licences, a 51% interest in 1 licence, and 49% interests in 14 licences.

Operations in Canada

In Canada, the ORLEN Group conducts production operations in the Alberta province, using horizontal drilling and hydraulic fracturing technologies. In 2015, 16 such operations were performed, with the average production rate in Q4 2015 at over 7,300 boe, including 45% of liquid hydrocarbons (crude oil and condensate).

In December 2015, through the subsidiary ORLEN Upstream Canada, the ORLEN Group acquired production assets located in the region of Kakwa in Alberta from Kicking Horse Energy. The acquisition increased the Group’s 2P hydrocarbon reserves and production in Canada. As at the end of 2015, production from the assets in the Kakwa region stood at over 4.5 MBOE/d.

The acquisition on the stable Canadian market is aligned with the risk profile set out in PKN ORLEN’s strategy. Good deposit parameters of the new assets and growing operations in a well-surveyed area mitigate the operational risks associated with the investment. Furthermore, given the effectiveness of the applied horizontal drilling and multi-stage fracturing techniques, there is an opportunity for experience sharing between the Polish and Canadian teams and for achieving synergies. The Canadian market also offers good access to drilling and well services, as well as qualified personnel experienced in unconventional hydrocarbon extraction. Equally important are the stable tax regime and business-friendly regulatory environment.

ORLEN Upstream also holds a 10.7% interest a project involving the construction of a liquefied natural gas export terminal on Canada’s east coast (Nova Scotia), Goldboro LNG, which is in an initial execution phase.

Assets in Canada

Assets in Canada
Source: In-house analysis.

Sales volume of the Upstream segment [‘000 tonnes]

  2015 2014 Change %
Sales value volume value volume
1 2 3 4 5 6=(2-4)/4 7=(3-5)/5
Upstream segment            
Crude oil 104 96 188 100 (45%) (4%)
Natural gas 68 179 84 133 (19%) 35%
Other 43 35 26 25 65% 40%
Total 215 310 298 258 (28%) 20%

The production and sales of hydrocarbons in Canada are conducted through ORLEN Upstream Canada Ltd. In 2015, Upstream segment’s sales on the Canadian market totalled 310 000 tonnes of crude oil, natural gas and NGL (Natural Gas Liquids). The acquisition of a 100% stake in FX Energy in December 2015 resulted in an additional volume of hydrocarbon sales on the Polish market starting from 2016. As at December 2015, average production from the acquired FX Energy’s assets amounted to 1, 300 boe/d.

The prices of crude oil and gas had a major impact on the production of hydrocarbons.

Revenue and sales volumes of the Upstream segment

Revenue of the ORLEN Group upstream segment
1) Mainly Natural Gas Liquids.
Sales volumes of the ORLEN Group upstream segment

See also

ORLEN Group's business modelThe ORLEN Group and its environment

see more

Summary of strategy implementation in 2015Our ORLEN Strategy

see more

Management's discussion and analysisFinancial results

see more

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